Source: Transocean
If you've invested in or have followed offshore drilling stocks over the past year, you know what it's been really, really ugly, and shares of almost every company in the industry are down 25% or more. The market is moving like this for a reason, so it's important that investors understand what's happening with the industry -- and how that relates to the companies you invest in -- before jumping in or getting out.
Let's take a look at three important industry terms for offshore drillers. These terms aren't the "end-all, be-all," but they will help you better understand the industry and the companies you're following. In short, they should help you invest better. Let's dig in.
Day Rates
This may be the most important metric for offshore producers.
What is it?
The day rate is how much revenue an offshore driller gets each day it operates at a drilling site. Day rates vary by a lot, depending on the type of vessel. Jack-ups, tenders and platforms get the lowest rates -- the majority of this group gets $120,000 per day or less on average. Jackups that can operate in water depths greater than 300 feet see $178,000 on average right now, but this accounts for less than half of all jack-ups.
The majority of the global jackup inventory is more than 30 years old and in declining demand. Source: Diamond Offshore.
Semisubmersibles and drillships command much higher day rates, because they operate in deeper water and harsher conditions than jackups, which must rest on the seabed. These types of ships are more expensive to operate, and the added risk of the environments they perform in also adds to the cost that offshore drillers command. Just like their jack-up brethren, these kinds of vessels also vary in capability, with rates for the least capable semisubs -- operating only in water less than 1,500 feet deep -- contracted for an average $284,000 per day, while the most capable drillships -- capable of drilling in water more than 4,000 feet deep -- commanding more than $500,000 per day.
Why it matters
The offshore drilling industry is undergoing major bifurcation right now, with the majority of new oil and gas discoveries further offshore and in places like the Arctic Ocean and the north Atlantic, where conditions can be incredibly harsh and downright dangerous. Ships which can operate in these conditions more effectively and safely will command higher rates.
The reality is, most of the new reserves out there will require these newer, more capable vessels, while demand for low-spec jack-ups and floaters has begun to decline.
The majority of the global rig supply consists of less capable vessels, and falling demand is leading to an oversupply of low-spec vessels competing for less work. This is already putting downward pressure on day rates in the segment of vessels at the bottom end of the market. Operators with the most capable vessels are the ones that will be best protected against declining day rates.
Utilization
This is the percentage of work days available that a subsection of vessels are operating under a contract. It can be used to look at the entire industry, a specific class of vessel, or within a specific company to measure its historical and current ability to get and keep its ships working and earning money.
Why it matters
My grandfather is the first person who told me that a boat is a hole in the water you pour money into, and this is very much the case with drilling vessels. These ships cost a significant amount of money to maintain even when they aren't under contract, so it's literally stepping backwards to have ships available but not working. Add in that most offshore drillers carry a large amount of debt -- often tied to those assets -- and it's doubly important that they be kept working.
Like just about every metric out there, using the proper context is critical. For example, Rigzone includes ships under construction but not yet deployed, which can skew the numbers, especially if the ship is more than one year from entering service. However, it's common practice for offshore drillers to issue regular fleet status reports that are publicly available. Here is how some of the industry leaders, including Seadrill Ltd (SDRL), Transocean (RIG -2.29%), Ensco Plc (VAL), and Diamond Offshore Drilling (DO) stack up:
Data source: Company fleet status reports
As you can see, there are several ways to look at utilization. The data above is from the most recent publicly available data released by these companies. The difference between "total" and in-water" utilization is that vessels under construction are factored into the "total," while they are excluded from "in-water."
Both metrics are important, because as you can see, Seadrill, which has by far the most aggressive newbuild program, also has the highest "in-water" utilization rate. This is directly attributed to the fact that its fleet is the most modern and capable, and it's these kinds of vessels that will have the most demand and command the highest day rates. On the other end of the equation is Diamond Offshore, which has the lowest number of newbuilds, and the second most available vessels not under contract.
There are ways the companies can reduce some of the cost of maintaining idle assets, such as stacking vessels, or taking them out of operation. While this can reduce expense, it also means a delay -- and some additional cost -- bringing that vessel back in service if it's needed.
Backlog
When a driller signs a contract, it typically covers a period of years or months at a set rate. The backlog is the unfulfilled value remaining on current contracts, and future contracts that have yet to begin.
Why it matters
Ideally, offshore drillers want to keep every available vessel under contract for as far into the future as possible, and the larger the backlog, the more predictable the company's business will be in the coming years. While backlog deals aren't ironclad, they tend to be very predictable sources of future revenues. Here are the backlogs of the four companies above:
- Seadrill: $20 billion
- Diamond Offshore: $6.2 billion
- Transocean: $25 billion
- Ensco: $11 billion
Backlog totals shouldn't be compared against other drillers, because they're dependent on the driller's fleet. For example, Diamond Offshore's backlog is much smaller than the others, but its fleet is also much smaller. A better way to use backlog data is to compare it to historical levels and measure how much future utilization is under contract.
Seadrill has the highest percentage of ultra-modern floaters in the industry. Source: Seadrill.
Of the four, only Seadrill's backlog has grown from the beginning of 2014. Transocean's is down about 8%, while Diamond Offshore has seen its backlog fall almost 25% this year. Ensco's has stayed the same, but is down from early 2013's peak of $12 billion. Even Seadrill's growth this year is less impressive if you look back one year, when the backlog was the same as it is today.
The industry as a whole is experiencing some tightness with backlog growth, as the oil and gas industry has tightened the reins on exploration investment. The questions investors are asking now are how long will this last, how much will it affect day rates, and which drillers will come through it in the best shape?
Drilling down on drillers
The data you get based on these three metrics won't predict the future. However, it will help you identify which drillers are best positioned for future success. More importantly, it will help you measure how the businesses are doing when the market's going crazy. That knowledge will help you make better decisions, no matter what the market is doing.
